LUMPENPROLETARIAT—This week’s edition of free speech radio’s Guns and Butter featured a fourth installment of host Bonnie Faulkner‘s coverage of the 2012 MMT Summit in Rimini, Italy. (See the first broadcast here, the second broadcast here, and the third broadcast here.)

Understanding modern monetary theory (MMT, or modern money theory) is vitally important for the working classes with respect to socioeconomic justice and government spending policy. MMT shows us how we can use modern money for public purpose or social spending, such as a job guarantee programme, which can eliminate involuntary unemployment. Full employment is a revolutionary goal, which can alleviate, if not eliminate, sundry social ills. And it is certainly a welcome step toward a more egalitarian, more democratic, and more emancipatory society. Guns and Butter host Bonnie Faulkner was prescient enough to travel to Italy to document this historic MMT Summit event and broadcast a series of weekly installments across American free speech radio.

The 2012 MMT Summit in Rimini, Italy was organised by Italian journalist Paolo Barnard, who worked to bring the revolutionary insights of MMT to the general public. The MMT Summit was held in a large stadium, which hosted an audience of thousands of non-economists, a very rare occurrence. The fact that non-economists are increasingly interested in economics is a testament to the growing awareness of the ways government economic policies affect working class lives.

Part One in this Guns and Butter series on the MMT Summit featured heterodox economists hailing from the radical Economics Department at the University of Missouri-Kansas City, one of the nation’s precious few heterodox economics departments. Dr. Stephanie Kelton gave a brief introduction to “the basics of MMT in four parts”; and Dr. Michael Hudson provided a more historical approach to understanding modern money by discussing “the difference between central bank credit, or money, and commercial banks”. Listen (and/or download) here. [1]

Part Two in this Guns and Butter series on the MMT Summit featured heterodox economist Dr. Alain Parguez, who illustrated how a nation’s money system can go horribly wrong without an understanding of modern monetary theory. This has been the case for Eurozone nations, who have suffered national debt burdens and faced draconian austerity politics from the European Central Bank, since they gave up their monetary sovereignty when they abandoned their respective national/sovereign currencies and agreed to adopt the euro as their currency. Dr. Parguez provided important insights into the origins of the Eurozone, the problematic legal foundations of the European Union following the 1992 Treaty of Maastricht, and how the adoption of the euro restricts the economic policy space of the Eurozone nations. Listen (and/or download) here. [2]

Part Three in this Guns and Butter series on the MMT Summit, featured economist Dr. Marshall Auerback. Dr. Auerback wears many hats so to speak, including that of a Fellow at Economists for Peace and Security, a research associate with the Levy Institute, and a global portfolio strategist with Madison Street Partners. And, on this occasion, Dr. Auerback is an advocate for MMT-based economic policy proposals. He elaborated on the importance of understanding modern money in order to protect a nation’s monetary sovereignty and, therefore, economic well-being. In so doing, he emphasised the irony of the fact that “the very policies the Allies imposed on Germany after World War I”, which contributed to the development of Nazi Germany and the horrors of World War II, “are now being introduced to some degree by the Germans in countries like Greece, Italy, Portugal, and Spain”. Listen (and/or download) here. [3]

This week’s broadcast, Part Four in this Guns and Butter series on the MMT Summit, focused on remarks presented by Dr. Stephanie Kelton. Dr. Kelton further elaborated on modern money theory (MMT) and also offered up emancipatory economic policy proposals, which are feasible with modern money, such as in the United States with its sovereign currency, the U.S. dollar. Listen (and/or download) here. [4]

Messina

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[Transcript by Messina for Guns and Butter, Media Roots, and Lumpenproletariat]

GUNS AND BUTTER—[28 MAR 2012] “Modern Money Theory and Private Banks” with Stephanie Kelton and Michael Hudson at the economic Summit on Modern Money Theory in Rimini, Italy.

“MMT emphasises the relationship between the state’s power over its money and its power to do things, real things, to conduct policy in an unconstrained way. It emphasises that the state, because of its power over money, has a form of power to command resources in the economy.” —Dr. Stephanie Kelton

“Today’s presentation was given at the first Italian grassroots economic summit on Modern Money Theory in Rimini, Italy in February, 2012.

“Stephanie Kelton is associate professor of economics at the University of Missouri, Kansas City, research scholar at the Levy Economics Institute, and director of graduate student research at the Center for Full Employment and Price Stability.” (c. 1:45)

DR. STEPHANIE KELTON:“I’m going to cover some new ground. And I’m also gonna go back and talk a little bit about a few really important concepts in MMT, that Paolo [Barnard] asked me to spend some more time talking about because I, maybe, went a little bit too quickly in one of the previous lessons. So, let’s talk about MMT. And why we think it’s such a revolutionary way to think about so many important economic questions.

“A day ago, two days ago, I forget, I’ve been awake a long time. The Financial Times ran an article on MMT. It was a big deal for us in terms of getting these ideas out there, into the mainstream and taken seriously by politicians, financial writers, and journalists, academics, and even into the hands of regular people, who pick up and read the papers. (c. 2:53)

“The Financial Times piece said that seeing MMT is like seeing an autostereogram, those images that look wavy and like there’s no picture. But if you let your eyes rest long enough, the picture becomes clear. And this is how the Financial Times described MMT. Some people might see it right away. And others will have to spend more time wrestling in their minds with some of the ideas because they’re so counter to everything, that we’ve been taught and that we thought we understood about money and government deficits and debt. (c. 3:39)

“And, so, I wanna go back and talk again about some of those important concepts. We think, most people think, that the government collects taxes from us. And raises money by selling bonds, so that it can finance its expenditures: ‘The government needs our money, in order to spend.’ But MMT rejects that. MMT says that a sovereign currency issuer doesn’t have to go out and get the currency from the users in the economy. The sovereign currency spends its own IOUs, it spends its own money. It creates its own currency. (c. 4:32)

“Not only that, but the taxes they collect from us can’t actually finance anything. And the bonds, that are sold to raise revenue for the state, in a sovereign government, also doesn’t pay for government spending.

“We think of two aspects of monetary channels. We think of a vertical channel; this is where state money becomes important. MMT emphasises that the state spends by issuing, what we call, high-powered money. High-powered money is a fancy word for the currency of the state, the notes, the coins, and also the liabilities of the central bank, that are called bank reserves. (c. 5:27)

“When you and I write a check to the government to pay our taxes, the check goes through a process where our bank account gets debited; and the numbers go down. A government account gets a credit; and the numbers go up. But the money supply, the high-powered money itself, the liabilities of the state aredestroyed in the process. They are eliminated from balance sheets. The money has gone down the drain and it can’t be used to finance anything. (c. 6:07)

“In addition to the vertical money—the state money—there is a horizontal aspect in any modern monetary system. Most of the transactions in the private sector don’t involve the government, but private-issued credit money. We can think of this as the leveraging of state money. So, high-powered money is the liability of the government. It sits at the top of the pyramid. And the private sector uses the government’s money to leverage the creation of its own IOUs, its own money, its own debt. (c. 6:58)

“In all modern systems, the central bank targets an overnight interest rate. And then it supplies reserves, on demand, horizontally, at the interest rate, that it sets. It also drains any excess reserves using what we call open market operations, buying and selling government bonds to hit its overnight interest rate target. So, bonds are thought of, more appropriately, not as a financing tool, but as an instrument of monetary policy. Bonds help the government coordinate the reserve add, that is caused by its government spending, with the reserve drain, that’s caused by the collection of taxes.

“In the US, the Treasuryand the Fedhave a very complex way of coordinating the government’s fiscal operations. Many of us in the MMT school have written about this. It is very complex. It involves a lot of institutional detail and it isn’t something, that we need to cover here today. If you’re interested in finding out how the very detailed operations work, you can look for something published by Scott Fullwileron the New Economic Perspectives blog. You can look back at an article I published in 2000, in the Journal of Economic Issues, that was called ‘Do Taxes and Bonds Finance Government Spending?‘ (c. 8:52)

“And, of course, Randy Wray’sbook, Understanding Modern Money, also deals with some of this. But I’m gonna skip over the operational details and just tell you that when government spends it adds new money to the banking system. When government collects taxes, it takes money out of the banking system. If the government spends more than it takes out, we say that the government has run a deficit. The deficit leaves extra reserves in the banking system. And this triggers a response by the central bank. The extra reserves push the interest rate down. This is different from what conventional economics teaches us. Conventional economics teaches that a government deficit should push interest rates up because the government is thought to compete for some limited pool of savings, and if you want to increase your deficit, you have to pay a higher price to get some of those savings. MMT rejects that.

“We understand that the state creates money, that money is not scarce, that the government doesn’t borrow household saving to finance its deficit, but rather spends first, creating the reserves, that it then drains by selling bonds. So, the private sector loses the reserves and gains the government bonds. This is how bonds are used to maintain interest rates in a sovereign currency setting.

“We use a graph. I don’t know how helpful it is. But the vertical component, is this component, that goes straight up and down, and it shows that Treasury spending adds high-powered money (HPM), that builds up in banks until we pay taxes and then some of that money goes down the drain or banks use the state money to create their own liabilities, lending to private citizens and to private firms, leveraging the state’s money. (c. 11:31)

“So, this is what we like to think of as the vertical and horizontal parts of the story in MMT. It incorporates the credit theory of money, endogenous money theory, and state money. It’s all related to Lerner’s Theory of Functional Finance. In that piece that Lerner wrote, entitled ‘Functional Finance and the Federal Debt,’ Lerner explained that taxes don’t finance anything. The government can’t spend the money it collects. It’s eliminated. And he understood that bond sales are a tool for conducting monetary policy. Conventional economics teaches that bonds are a tool for fiscal policy, that they are financing tools. MMT views that very differently. The bonds are important because they allow the central bank to sell and buy bonds, adding and draining reserves from the banking system in order to hit its interest rate target. (c. 12:44)

“So, we should reject the orthodox theory because it’s wrong. Conventional wisdom on government finance, taxes, and bonds is incorrect. The conventional theory is that if the government were to finance its spending by creating new money that it would be inflationary, hyperinflationary, they usually say. But, in fact, as MMT shows, all government spending is, by definition, financed by the creation of new money. Sometimes, people think that we’re proposing that government do something different, that MMT says sovereign governments should finance their spending by creating new money. We’re just describing the way they do it now. So, this isn’t a policy proposal. It isn’t going to lead to inflation because they already do it that way and it’s not inflationary. (c. 13:52)

“The orthodox position again suggests that the government sells bonds and that they have to compete for some little, limited, pool of financial resource that’s out there, and if the government wants a piece of that pool and private firms want a piece and households want a piece, we have to outbid one another, and the price of those savings goes up. The argument in the textbooks is that as the price goes up, the interest rate rises, that this crowds out other forms of spending. The government comes in and sees that pool and says I want this piece, pushes the interest rate up for all of the other borrowers who want to borrow. (c. 14:43)

“And, so, it crowds out the more efficient kinds of private sector spending to make room for the inefficient big government spending. This is the conventional story. But, of course, this is wrong. The bonds are sold in order to take back government money that was created by running the government deficit in the first place. So, the deficit creates the money that is then made available for purchasing the bonds. The pool of resources is not limited. It grows with deficit spending.

“So, everything that the conventional story teaches, what students in any economics class, in any classroom—as we were told yesterday, in Italy they’re being exposed to an orthodox, neoclassical version of economics that doesn’t apply to governments that issue a sovereign currency.” (c. 15:54)

DR. STEPHANIE KELTON:“MMT emphasises the relationship between the state’s power over its money and its power to do things, real things, to conduct policy in an unconstrained way. It emphasises that the state, because of its power over money, has a form of power to command resources in the economy. The state imposes the tax; that allows the state to get people to want to work and produce and provide things to the state in order to get the money that they need to settle the tax liability. This way, the state has command over how to use society’s resources. It’s not something that’s immediately obvious, but it’s central to MMT. (c. 17:06)

“And, so, at an event like this, what we want to do, as much as anything, is to lift that veil that conceals the potential that the state has to use the monetary system in the public interest. [applause]

“We talked a little bit yesterday about how economists think about the problem of unemployment. Essentially, there are three options when it comes to dealing with the inevitability of unemployment in any market economy. Pure unemployment means that the unemployed sit idle, as a buffer stock of people—human beings—who get no wage and have nothing useful to do. They are assigned no tasks and they have no income.

“Under most systems, there is some form of support for the unemployed, a safety net of some kind. It might be unemployment compensation, a small payment made to the person who’s lost a job and can’t find one. That payment might go on for a period of weeks, months, or even years. All the while, the person is drawing an income, but has no tasks to perform.

“The third option, the one that MMT prefers, is a buffer stock of, not, unemployed, but of employed people. And I talked about this yesterday and we referred to it as an Employer of Last Resort [ELR] programme or a Job Guarantee. In a programme like this, when a person loses a job in the private sector or in the public sector, they have another job to go to. The government does not allow them to sit idle and to pay them to do nothing. It assigns them a useful task, something society needs done. They get a wage. And they get a task.

“We mentioned yesterday that Argentinaimplemented a form of a Job Guarantee, theirs was called the Jefes Programme. It offered a job to the head of household. It gave them a useful task and it paid them a basic wage. It was highly successful.

“ELR provides people with a transition job, as the economy goes through its normal business cycle of ups and downs. And then business lay off and then rehire workers, these people have a place to go. They don’t sit idle in the unemployed pool. They work in a pool of employed people.

“The Job Guaranteeprogramme performs the task of a genuine automatic stabiliser; no government bureaucrat has to decide whether to spend when unemployment increases. No bureaucrat has to decide; it happens automatically. If you become unemployed and you would like to participate in the Job Guarantee programme, you show up and you’re assigned a task and paid a wage. You may receive training while you’re in the programme. When the private sector recovers and begins hiring again, workers will flow out of the Job Guarantee pool and back into other forms of employment. In this way, the Job Guarantee is a buffer stock programme. It buffers the economy against the inevitable economic cycle. So, society gets workers performing useful tasks; the people get to do something useful that makes them feel like they are contributing members of society. They have wages and benefits instead of nothing or a very minimum with probably no benefit.

“We’ve never had a Job Guarantee programme in the U.S. But we did have an interesting programme that did many of the same kinds of things. Someone in the audience asked yesterday about Roosevelt’s New Deal. When Franklin Delano Roosevelt was president and the U.S. economy was in the throes of the Great Depression, Roosevelt instituted an alphabet soup of jobs programmes: the WPAwas the Works Progress Administration, my grandfather, one of them, worked in the WPA; the CCCwas the Civilian Conservation Corps. Some of you have asked about environmental problems and whether MMT has anything to say about environmental policy or energy policy. The CCC was very much concerned with the environmental aspects. The NYAwas the National Youth Administration. This was a programme designed, specifically, to deal with the problem of youth unemployment, which we know is a very serious problem in many parts of Europe today. (c. 22:59)

“Roosevelt’s programmes hired the unemployed, gave them a wage, and gave them something useful to do. They built hospitals, schools, parks, bridges, roadways, airports, stadiums, and much, much more. They rebuilt America. The programmes employed millions of Americans in productive and socially useful jobs. Builders, architects, engineers, and even painters, poets, and actors were employed in these programmes. But this is something on a huge scale. It requires the ability to run large government deficits. It requires sovereign money. With sovereign currency and a commitment to functional finance, people can design a democracy that works for them.

“When the people understand this, it eliminates for the policymaker their excuse for not acting. They cannot say, we don’t have the money to do it. Whatever is physically possible is financially feasible. The only constraints that we concern ourselves with, in MMT, are real constraints. We have already overcome in our minds, because of the monetary system and our understanding of it, the financial constraints. They don’t exist. The issuer of the currency can mobilise resources to achieve public purpose. In any democracy, the people should decide what that means. As long as the real resources are available—when I say real resources, I mean the land, the cement, the steel, the real things you need to build roads and bridges and airports and schools, whatever it is that you decide you want and need as a people—as long as those things are available, the government, through its power to tax and spend and power to control its currency, can mobilise those resources for the benefit of all.

“Certain activities are simply too important to be left entirely to markets and their profit motive, as orthodox economics would have it. Care for the environment, energy security, healthcare, income security for the elderly and the dependent, and so on, and so on, are too important to be left to market forces. MMT shows us all that a new and better world is possible. (c. 26:15)

“Okay, so I’m going to turn to a very important concept in MMT—the use of sectoral balances to analyse what’s happening to the financial positions of different sectors in the macroeconomy. We’re gonna begin by recognising that deficits are normal. Capitalist economies, many capitalist economies, run permanent deficits. Surpluses are rare and fleeting in many large, rich countries in the world. For some countries, the deficit emerges the ugly way. The deficit appears because the economy is in trouble. A recession causes rising unemployment and falling income. When incomes fall, tax revenues drop off; deficits explode. You’ve all seen that. There’s an even uglier way to run a deficit and that is to implement fiscal austerity—recession by design. And then there are the good deficits, the kind that MMT understands, doesn’t worry about, and supports. The government can run a deficit by allowing its budget to expand and contract without any arbitrary limit to its size or to the time-frame, under which the deficit is allowed to be sustained. (c. 28:10)

“With the kinds of policies that I’ve outlined, Job Guarantee and beyond, these may require the government to run deficits most, or even all, of the time. So, the question is: Is that good economics?”

DR. STEPHANIE KELTON:“A deficit hawk, we call them in the United States, is someone who is opposed to the deficit on principle. A deficit hawk often favours what they call ‘sound money,’ a gold standard, a monetary union. A deficit hawk would legislate rules that mandate balanced budgets at all times. A deficit hawk believes that there’s no such thing as a good deficit. And a deficit hawk supports immediate austerity to sharply reduce budget deficits.

“A deficit dove is a friendlier bird. A deficit dove supports limited deficit spending in tough economic times. But the doves want the government’s deficit balanced over the business cycle. Deficits in bad times, surpluses in good times, balanced over the cycle.

“A dove supports rules to limit or constrain government spending. Think of the Stability and Growth Pact, which allows small deficits, but also expects surpluses over the cycle. A deficit dove recognises that the deficit is important when the economy turns down and they’re willing to run the deficit in difficult times. But they want austerity after the economy recovers. What are they worried about?

“Both the hawks and the doves are worried about the negative consequences of running a deficit. They are convinced that, at some point, markets will refuse to lend at reasonable rates; interest rates will spike; the debt will become unsustainable; and they think that running large deficits will eventually lead to serious inflation. Paul Krugman is a deficit dove. MMT knows better.

“If the government takes advantage of its status as the issuer of the currency, the government could finance its deficit without borrowing at all. It could be done with no bond sales. This means no discipline from the bond markets. No bond market vigilantes. No solvency problem to deal with. Interest rates would be lower, not higher, as [Paul] Krugman would suggest.

“But what about inflation from running the economy too hot? MMT doesn’t recommend that you run the economy too hot. MMT recommends using deficits to bring the economy up to full employment, not to push it beyond. This is a common criticism that we deal with from our critics who say we want huge deficits and beyond full employment and we never want them to stop and they’ll always be large, and, therefore, we must be insane.

“So, they mischaracterise us, so they can mock us. Functional finance calls upon the government to maintain full employment and price stability. We are as concerned with inflation, as anyone. But we don’t view it as a serious problem when the economy is operating far below full employment with lots of available unused resources. The government has plenty of space to push the economy before inflation should become a relative concern. (c. 33:18)

“Okay, MMT emphasises that you cannot examine, weigh in on, give opinion to, make statements about the size of the government’s deficit or budget overall in isolation. You cannot look at just one sector in the economy when we have a multisector economy. You need to understand how the government’s budget is related to the rest of the economy. To do this, we need a basic understanding of sectoral balances. (c. 34:03)

“So, what did the sectoral balances show? In any given period, they show whether a particular part of the economy is spending more than its income—running a deficit—spending less than its income—running a surplus—or spending just equal to its income—balancing its budget. We have to look at three sectors: two internal sectors—domestic sectors—and one external sector. The internal sectors are your domestic private sector—the combination of all the households and firms in the country put together for analytical purposes—and the domestic public sector—local, state, provincial governments, national government. Outside of the domestic sphere is the external sector. This is the rest of the world. We can call it the foreign sector, foreign governments, foreign households, foreign businesses. (c. 35:20)

“So, we have three sectors and two rules. The two rules are that all three sectors cannot be in surplus at the same time. And all three sectors cannot be in deficit at the same time. These are not my rules. These are the rules of accounting. One person’s surplus is another person’s deficit. The only way for one sector to run a positive balance is for at least one other sector to run a negative balance. You might think of having three coins: heads is positive, tails is negative. Hold three coins in your hand and flip all three, if they all come up heads, throw it out; it won’t work. If they all come up tails, throw it out. You can have two heads and a tail—two surpluses and a deficit—or two tails and a head—two deficits and one surplus. (c. 36:38)

“Balance sheet rules apply. Instinctively, we probably think there’s something inherently better about being in a surplus position. But, remember, we can’t all be in surplus at the same time. It defies the laws of accounting. At least one sector must be in deficit. (c. 37:09)

“Here we see the government sector on the left and the non-government sector on the right. The non-government sector includes domestic households, domestic firms, and the rest of the world, everyone who’s not government. If there’s a surplus in the government sector than, by definition, there is a deficit in the non-government sector. If the government is in deficit, then, by definition, the non-government sector is in surplus. (c. 37:57)

“Two choices: two heads, one tail; two tails, one head. Which one’s better? The private sector needs to be in surplus almost all the time. As a general rule, the private sector cannot survive in a deficit position. Households and firms, as users of the currency, cannot continually spend more than their income. At some point, even the financial wizards of Wall Street will run out of credit-worthy borrowers who are looking to borrow more. When that happens, asset prices go sideways; sales soften; jobless claims go higher; and the economy turns down. Government budget moves into deficit automatically, the ugly way.

“The private sector cannot create net wealth for itself. Businesses, banks, and households together can borrow and lend, but every asset is offset by a liability from someone else in the private sector. The assets and liabilities cancel each other out. We can’t create net financial assets internally by ourselves, as a private sector. Net financial wealth must come from outside the private sector.

“So, where do surpluses come from? Remember that a surplus means that your income exceeds your expenditure. A deficit means you’re spending more than your income. Any one of these sectors—the private sector on the left, the public sector and the foreign sector on the right—any one of them can be in deficit or surplus, but they can’t all be in deficit or surplus together.

“If the government sector is running a deficit, it tends to add to the private sector’s surplus.

“If the rest of the world is running a deficit against Italy, that means Italy has the surplus. Either, a government deficit or a trade surplus will increase the private sector’s net wealth. This is—for those of you who might’ve wondered where the equation came from—it comes from the national income accounting. I’m just showing you, so that you know I’m legitimate. You just move identities around. Trust me, okay? (c. 41:42)

“On one side of the equation, you see where our nation’s income comes from. I call that sources of income. On the other side of the equation, you see how we use our income. Sources and uses have to be equal. We can set these equations equal, move terms to other sides, and write this equation here. Which is the important equation for us? (c. 42:10)

“This is the difference between what the private sector is saving and spending. This is the difference between what the public sector—the government—is spending and collecting. This is the difference between what the rest of the world is buying from you—your exports—and what you are buying from them—imports.”

DR. STEPHANIE KELTON:“I mentioned that if the private sector is going to be in surplus, it requires at least one other sector to be in deficit. This is the actual data for Italy. The red line on the bottom shows the government’s budget balance. You can see that in every year, since 1996, the Italian government has run a deficit. You can also see that the bigger the deficit in the government sector, the bigger the surplus in the private sector. Indeed, they almost look like they move exactly opposite to one another. You could even say that as the government goes down, you go up. That’s a different way to think about the government’s deficit. I’m not making it up. (c. 44:08)

“Here’s Ireland. It looks similar. As Ireland’s government deficit exploded, so did the accumulation of financial assets—savings—in the private sector.

“Greece: similar.

“Spain: as deficits increase—here’s Spain at more than 10% deficit to GDP and here’s the Spanish private sector in surplus.

“Germany: Germany runs surpluses on occasion. But what happened to the private sector? As Germany’s budget moved in to surplus, you can see here in this period where the German budget was in surplus and the private sector was driven into deficit, not some place the private sector usually spends much time because the private sector can’t survive in deficit. (c. 45:20)

“Here’s the United Kingdom, Japan, and the United States. The large deficits that have been run since the downturn in the economy following the financial crisis, huge deficits that have terrified the hawks, have helped the private sector rebuild and repair their balance sheets by adding to their financial savings. This makes for a good deficit. The reason that the two lines were not perfect mirror images in the last set of graphs was because I didn’t include the foreign sector. I just wanted to focus you in on the relationship between the public sector’s deficit and the private sector’s surplus.

“Here is a complete picture for the United States. Every area in red shows you the US government’s budget position. Anything that falls below zero indicates a public sector deficit. You’ll notice that the U.S. government is almost always in deficit. The blue represents the private sector’s balance. You’ll notice that the private sector is almost always in surplus. The green represents the foreign balance. It’s been quite some time since the US ran a positive trade surplus. You can see a few back in the early years. We are now running trade deficits, sometimes, fairly substantial ones. And that reduces the private sector’s surplus.

“So, let’s focus in on a specific period of time. The period in the late 1990s and early 2000s when for the first time in decades the US government ran budget surpluses. You can see those surpluses where the red goes into positive territory. These years here represent government budget surpluses. Many people would inherently think that would be a good thing. It shows fiscal responsibility. Not only did they balance the budget, but they put it in surplus. Meanwhile, our current account deficits were huge. The rest of the world was running large positive balances against the US. That reduced US private- sector savings. Surpluses fell. It pushed the private sector into deficit on an unprecedented scale. The private sector went from surviving above the zero line to being pushed below zero. And the private sector remained there for a period of years, spending more than its income, borrowing to do it. And it was all fueled by a massive bubble economy that ended in recession, which drove the public sector’s balance back into deficit where it belongs. (c. 49:16)

“Okay, the last part that I want to introduce this morning is the Financial Balance Model. We are very excited in the MMT world about this model. It was developed by a friend of ours, who is an outstanding economist. His name is Rob Parenteau. He writes on the New Economics Perspectives blog. And he came up with this model. And it is the framework that allows us to compare all three sectors’ budget positions in a graph. Economists like graphs. So, in fact, it’s how you gain credibility in our world. So, one must use models and graphs. (c. 50:15)

“The vertical axis measures the public sector’s budget position. If the government is in surplus, we’ll be in the top half of the graph. If the government is in deficit, we’ll be in the bottom half of the graph. The horizontal axis measure’s the current account, the foreign balance.

“If you’re on the right half of the graph, the current account is in surplus.

“If you’re on the left half of the graph, the current account is in deficit.

“The dashed line shows the private sector’s financial balance set at zero.

“So, every point along the dashed line is a point where the private sector has no surplus and no deficit—spending equals income. Above the dashed line, the private sector is in deficit. Remember what I said: The private sector cannot survive in that territory. Below the dashed line, the private sector is in surplus. Okay? (c. 51:39)

“For a country that issues a sovereign currency, fiat money, no fixed exchange rate, the world is your oyster. You can be anywhere in the graph. There are no rules or reasons that you can’t be located anywhere. But remember the diagonal line, anywhere above that is unsustainable for the private sector. So, the only sustainable space is below that line, the green line.

“What about here for countries that use the euro? Where are you supposed to operate? Well, if you’re playing by the rules, your deficit is not supposed to exceed 3% of your GDP. So, we put in a lower bound at 3%, negative. This is the space that’s available—in theory. What about countries in the Eurozone that run current account deficits? Remember that current account deficit is every where to the left of the vertical line, but you can’t go below 3%. So, countries with a current account deficit, they get that rectangle. Countries that run current account surpluses have a different space. A country with a current account surplus can put its private sector in surplus with a smaller public sector deficit.

“Here’s the situation for a country that uses the euro and also runs a current account deficit. Can you see it? It’s a small space. This is the space that you are given to work with. Anything above the dashed line means a private sector deficit. It’s not a sustainable space for you, for any of us. You must be below the dashed line. But you must also be above the red line. But because you’re running a trade deficit, you’re also to the left of the vertical line. You get only to play in that little triangle. (c. 54:30)

“So, lets talk about what’s happened to Italy. Germany has crushed many members of the Eurozone through its labour policies that began in the early 2000s. Marshall [Auerback]talked last night about the Hirsch Commission and in Agenda 2012, which was Chancellor Schröder’seconomic miracle, whereby Germany ‘reformed’ its labour markets by reducing the power of their labour unions and their craft guilds making it easier for their employers to fire people at will, cut unemployment benefits, so that German benefits last about half as long as benefits in the US. They were harsh ‘reforms.’ And as they were being implemented, unemployment, initially, increased. It hurt the German economy, but not for long because that pain was soon transferred to others. (c. 55:45)

“So, I want you to look at this picture: Italy, in 1996, was running a trade surplus of more than 3% of your GDP. You had more fiscal space before the German policies. And now you have that little triangle. It doesn’t give you enough policy space without breaking the Stability and Growth Pact rules it is extremely difficult for you to keep the private sector in surplus and the economy healthy. I would say it’s impossible. (c. 56:22)

“Italy makes it into the small triangle, but not often. Most of the time, though, your deficits have been large enough to compensate for the trade deficits that you run and you’ve been able to keep your private sector in surplus. But that’s because the rules were broken. If you had played by the rules, for the last 14 years, you would have been successful three times.

“Ireland would never be successful. The space is just too small.

“You see Greece. The triangle for Greece is way up in the corner. They can’t play by these restrictive rules, either. (c. 57:05)

“Same problem for Spain.

“Germany, on the other hand does brilliantly, almost every point is to the right of the green line where the private sector is in surplus. Although, Germany breaks the Stability and Growth rules, like everyone else. It’s the large current account surpluses that Germany runs, thanks to all of you. It’s the secret to their success. It’s why they can run smaller deficits, stay out of trouble. You are financing it.” (c. 57:57)

BONNIE FAULKNER: “You’ve been listening to professor and research scholar, Stephanie Kelton at the Summit on Modern Money Theory in Rimini, Italy. Today’s show: Modern Money Theory Explained.

“Stephanie Kelton is Associate Professor of Economics at the University of Missouri, Kansas City, Research Scholar at the Levy Economics Institute, and Director of Graduate Student Research at the Center for Full Employment and Price Stability.

“She is Creator and Editor of New Economic Perspectives. Her research expertise is in Federal Reserve operations, fiscal policy, social security, healthcare, international finance, and employment policy.

“Myths about taxation and government revenues in a sovereign currency situation; debts and deficits; full social security and price stability; the use of sectoral balances to analyze the financial position of the different sectors of the macro economy; the three sectors of the macro economy; the two rules governing the three sectors; the financial balance model.”

“European Integration: The ECB Laid Bare” with Marshall Auerback. A history of European unification; problems today in the European monetary union; the three Germanys; the fallacy of composition; three possible solutions; Aesop’s Fable of The Ant and the Grasshopper as it applies to the European Union today.

LUMPENPROLETARIAT—This week’s edition of free speech radio’s Guns and Butter featured a third installment of host Bonnie Faulkner‘s coverage of the 2012 MMT Summit in Rimini, Italy. (See the first broadcast here, and the second broadcast here.)

Understanding modern monetary theory (MMT, or modern money theory) is vitally important for the working classes with respect to socioeconomic justice and government spending policy. MMT shows us how we can use modern money for public purpose or social spending, such as a job guarantee programme, which can eliminate involuntary unemployment. Full employment is a revolutionary goal, which can alleviate, if not remedy, sundry social ills. And it is certainly a welcome step toward a more egalitarian, more democratic, and more emancipatory society. Guns and Butter host Bonnie Faulkner was prescient enough to travel to Italy to document this historic MMT Summit event and broadcast a series of weekly installments across American free speech radio.

The 2012 MMT Summit in Rimini, Italy was organised by Italian journalist Paolo Barnard, who worked to bring the revolutionary insights of MMT to the general public. The MMT Summit was held in a large stadium, which hosted an audience of thousands of non-economists, a very rare occurrence. The fact that non-economists are becoming interested in economics is a testament to the growing consciousness of the ways government economic policies affect working class lives.

Part One in this Guns and Butter series on the MMT Summit featured heterodox economists hailing from the radical Economics Department at the University of Missouri-Kansas City, one of the nation’s precious few heterodox economics departments. Dr. Stephanie Kelton gave a brief introduction to “the basics of MMT in four parts”; and Dr. Michael Hudson provided a more historical approach to understanding modern money by discussing “the difference between central bank credit, or money, and commercial banks”. Listen (and/or download) here. [1]

Part Two in this Guns and Butter series on the MMT Summit featured heterodox economist Dr. Alain Parguez, who illustrated how a nation’s money system can go horribly wrong without an understanding of modern monetary theory. This has been the case for Eurozone nations, who have suffered national debt burdens and faced draconian austerity politics from the European Central Bank, since they gave up their monetary sovereignty when they abandoned their respective national/sovereign currencies and agreed to adopt the euro as their currency. Dr. Parguez provided important insights into the origins of the Eurozone, the problematic legal foundations of the European Union following the 1992 Treaty of Maastricht, and how the adoption of the euro restricts the economic policy space of the Eurozone nations. Listen (and/or download) here. [2]

This week’s broadcast, Part Three in this Guns and Butter series on the MMT Summit, featured economist Dr. Marshall Auerback. Dr. Auerback wears many hats so to speak, including that of a Fellow at Economists for Peace and Security, a research associate with the Levy Institute, and a global portfolio strategist with Madison Street Partners. And, on this occasion, Dr. Auerback is an advocate for MMT-based economic policy proposals. Listen (and/or download) here. [3]

Messina

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[Transcript by Messina for Guns and Butter, Media Roots, and Lumpenproletariat]

“And it is ironic, in many respects, that the very policies the Allies imposed on Germany after World War I are now being introduced to some degree by the Germans in countries like Greece, Italy, Portugal, and Spain.” —Marshall Auerback

“Marshall Auerback has over 28 years of experience in investment management. He is currently a portfolio strategist with Madison Street Partners, a Denver-based investment management group. He is a fellow with the Economists for Peace and Security and a research associate for the Levy Institute. He is a frequent contributor to New Economic Perspectives.

“Today’s show features introductory remarks by Marshall Auerback at the first Italian grassroots economic Summit on Modern Money Theory in Rimini, Italy, February 2012, produced by Italian journalist Paolo Barnard. The five speakers were Stephanie Kelton, William Black, Marshall Auerback, Alain Parguez, and Michael Hudson.” (c. 1:46)

MARSHALL AUERBACK: “I’m going to give you a small history lesson today just to explain that what you are experiencing today is nothing new. Arguably, this has been a problem that has affected Europe for the last 150 years. And the only difference is now it’s in the context of something we call the European Monetary Union.

“Before I start let me explain that I have worked in the financial markets. But when I started in the financial markets, we were trained to believe, in fact, finance was something that was the hand-maiden of industry and not the other way around.

“So, I have never played any role in creating these financial Frankenstein products like credit default swaps. I want to make that clear. There is an expression called Gresham’s Law, which states that bad money drives out good. Some of us, who stay in finance, are trying to bring back the good money and drive out the bad.

“Okay, so this is the problem that you face today in the European Monetary Union: When you joined the euro, you gave up your sovereign currency in favour of a new currency called the euro. So, in a sense, national central banks obtain reserves from the European Central Bank for clearing purposes. And the European Central Bank, in turn, is prevented from buying the public debt of the governments directly. So, in a sense, you have surrendered your national sovereignty. Your relationship to the European Central Bank is similar, in many respects, in all respects, in fact, to an American state or American provinces to the central bank. You are a user of a currency, but you no longer create your currency. And you have, therefore, lost your sovereignty. (c. 4:31)

“Now, the reason why this was done—there may have been noble, historical reasons behind it—there was a desire to avoid the horrors of what we experienced from two World Wars. And there was an ideal of creating a broader, United States of Europe. But, ultimately, the house, these United States of Europe that we are trying to create is built on very faulty foundations. And this faulty architecture is at the root cause of today’s problem. This is not a fault of Italy as a lazy Mediterranean profligate, as say, the Germans like to indicate. That is a myth being propagated by today’s financial elites, but it has no bearing in reality. (c. 5:32)

“Okay, so, here’s the history lesson. One could argue that the last 150 years has been a history of trying to deal with the so-called ‘German Problem’. Now, when I say that there’s a ‘German Problem,’ I’m not trying to suggest that there is a problem with the German people. And I’m not trying to reduce this to crude caricatures, like we’ve seen recently with some of the papers, where, for example, Angela Merkel has been appearing in Nazi uniforms. I’m not trying to say that there’s a problem in those terms.

“What I’m trying to suggest is that we’ve had a problem of a country, that has been historically much more dominant economically and politically than its neighbours. And we are attempting to resolve that problem in various different forms.

“Now, in the period of 1865 to 1870 it was very, very similar, in many respects, to the period we had in the aftermath of the fall of the Berlin Wall. We had a severely divided continent. And even Germany, itself, was a series of smaller principalities, which were gradually unified into one larger country during that period. (c. 7:10)

“Now, the creation of that nation-state did not originally cause any problems. And it didn’t because of the skillful diplomacy of Bismarck, who managed to keep her German aspirations in line and control the imperialist impulses of the Kaiser. Unfortunately, Bismarck, ultimately, retired. And the rest was history. Ultimately, the expansionist impulse of the Kaiser led to the disaster of World War I. (c. 7:56)

“And in the aftermath of that, we had the first way of dealing with the so-called German Problem. It’s what I call the Carthaginian solution. We tried to destroy Germany, punish them. We implemented very harsh reparations. And we occupied large parts of their country. And it is ironic, in many respects, that the very policies the Allies imposed on Germany after World War I are now being introduced to some degree by the Germans in countries like Greece, Italy, Portugal, and Spain. And we all know what happened. I’m not suggesting we are about to experience the rise of another Hitler, but certainly it is creating dangerous populist movements, which risks turning Europe into a much less civilised place, in which to live. And it leaves us with a much more difficult future. (c. 9:20)

“Now, obviously, the Carthaginian solution created a huge backlash. We had the rise of Nazism. And we had the Second World War. And after the Second World War, we tried a different approach. We divided Germany. In the West, we had the French and American inluence. And then East Germany became part of the Soviet bloc. And I think this, obviously, could work for a short time until the force of history caused Germany to be reunified. (c. 10:03)

“But I think it’s important to realise that the foundation of the modern German state came during that period. We had a ‘Western’ government, that was fully committed to the freedom of the market, the freeplay of supply and demand, and the importance of where the state had to intervene to insure that competition was not unduly hindered by cartels and monopolies. It was Germany’s social market economy. (c. 10:39)

“And this worked very, very successfully. It created the foundation of the modern Germany. And I think it’s worth pointing out at that time it was aided largely by American generosity in the aftermath of World War II. After the intense destruction of World War II, you didn’t have American politicians lecturing the Europeans about how they were lazy, profligate, and had to pull themselves up by their own bootstraps. The Americans responded with massive fiscal transfers equivalent to about 2½% each year for several years in the late 1940s. And this created the foundations for Europe’s greatest period of growth. So, it’s important to realise we had fiscal surpluses recycled to create growth, not to repay debts and, certainly, not to aid in the imposition of financial reunification. (c. 12:00)

“Now, obviously, once Germany was reunified, the whole issue of the German Problem arose again. There were some, such as Prime Minister Margaret Thatcher in Great Britain who worried that we were going to create a new Fourth Reich. But her concerns were, ultimately, overridden by the actions of what I would call the Europeanist wing in the German government. The theory was that if Germany bound itself into Europe fully, into a United States of Europe, that somehow the rest of Europe wouldn’t have to worry about the so-called German problem. So, we created the Treaty of Maastricht, which was negotiated in December 1991 and signed the following February where Germany’s sovereign powers were further reduced, in spite of the country’s tremendous post-war economic success, as an individual country. (c. 13:18)

“Now, that meant that Germany, like other countries, ultimately, would surrender the deutschmark. Europe, in theory, was to have a common foreign and defence policy and the frontiers of the European Union were going to be open. But there was a problem that came in the aftermath of the creation of the euro. In spite of the many benefits offered by a single-market economy, there was a question as to how many countries should actually join this new union. There were some who argued that the union should be small; it should be linked by a few countries that had common cultural, social, and economic policies. This so-called small is beautiful school, of which the Bundesbank was a core member, argued that pooled national soveriegnty, greater monetary and fiscal coordination were all more feasible where the countries involved had common comparable social, political, and economic structures and similar social outlooks. They argued that a large expansion of the Eurozone amongst a larger group of more heterogenous nations with substantially different ideological and historical traditions would complicate the desire and drive to converge.” (c. 15:05)

BONNIE FAULKNER: “You’re listening to economist and portfolio strategist Marshall Auerback at the Summit on Modern Money Theory in Rimini, Italy. Today’s show: European Integration: The ECB Laid Bare. I’m Bonnie Faulkner. This is Guns and Butter.

MARSHALL AUERBACK: “By contrast, you had the advocates of what I call a big and broad Eurozone. And they argued that the bigger the Eurozone the more likely the currency could compete with the decaying dollar standard as a viable reserve currency. Now, I think that’s questionable, but the gamble was that the euro was launched in the face of substantial regional economic disparities amongst the twelve founding members, both, in terms of unemployment rates and per capita income levels. And there was no corresponding fiscal authority to help alleviate these problems. (c. 16:10)

“The belief was that the longer these countries stayed under a common currency the more they would converge. And that’s been the gamble. And, clearly, it has not been successful. If anything, as we can see now, the disparities amongst the various countries has got worse, not better. So, you have to ask, Why did Germany, ultimately, agree to this larger structure, in spite of the problems it’s now created? And I think this is important because when you understand why Germany agreed to the bigger and broader union, it will help you to understand that they have been huge beneficiaries of this system, as it stands today. And that they are totally unjustified in criticising countries like Italy and Greece, Spain or Portugal for what has happened in its aftermath. (c. 17:19)

“Let me go into that in a bit more detail because I think when we speak of Germany there are actually three Germanies that we have to talk about. Germany number one is the Germany of the Bundesbank. This is the finance capitol, the segment of the country, which to this day retains huge phobias about the recurrence of Weimar-style of inflation and they have an almost theological belief in hard money and a corresponding hatred of inflation. In their heart of hearts, this Germany would probably rather be on a gold standard and, as much as possible, they have tried to recreate a Eurozone with a model of gold standard in mind. (c. 18:10)

“Germany number two is what I would call the internationalist wing of the country. And they were led for a long time by Helmut Kohl. This group is probably the foremost exponent of the idea that Europe can rid itself of the so-called German Problem, once and for all, if Germany binds itself to a United States of Europe structure and continues to help institutions that move the EU broadly in this direction. I think it is questionable whether this vision has survived significantly beyond the tenure of Helmut Khol, himself, but this is certainly a part of the German political spectrum, which still exists.

“Now, you could see the inherent tension between the two views. Bundesbank Germany would never allow vague internationalist aspirations to dilute the goal of sound money, low inflation, and fiscal discipline. You can almost imagine many of them looking askance at the Treaty of Maastricht and the corresponding threat to their ideals of sound money, which brings us to the key variable in German politics.

“Germany number three—and that’s industrial Germany. This is the Germany of Siemens, Daimler-Benz, Volkswagen, and the great steel and chemical companies, the capital goods manufacturers. These companies have clearly benefitted substantially from the economic stewardship provided by institutions such as the Bundesbank. But they also recognised that there were huge benefits entailed by a completely open and integrated European market, which was still the largest component of their sales. In their eyes, a currency union—even if it meant the admission of so-called fiscal profligates, such as Italy and Spain—minimised the threat of competitive currency devaluations. So, the idea really was: lock in countries like Italy and Spain into uncompetitive exchange rates,insure that they could never use their currency to bear the burden of economic adjustment, and, thereby, entrench Germany’s dominant export position in global trade. (c. 20:51)

“And this is why Germany, today, continues to run large current account surpluses. Yet, still has the audacity to blame other countries, such as Italy and Greece for running large deficits when they use those deficits, in fact, to buy German-manufactured products. And I think that when the Germans contend that they are doing nothing, but bailing out profligates and they have derived no benefit from the union. They crucially forget this component of the European Economic Union. (c. 21:39)

“So, I think, what we have today is a dysfunctional marriage. The partners haven’t grown together. Countries such as Greece, Portugal, Spain, Ireland have benefitted from the illusion of economic convergence through lower interest rates and a stable currency. And when the European economy was growing these markets indulged the fantasy that there was little to choose between, say, Greek bonds and German debt. And that’s all now changed. All these countries now are struggling to compete with a much more productive German economy. But because of fiscal austerity and the rules of the Stability and Growth Pact, they are given no means of competing and they are consigned to a form of indentured servitude. There is a feeling that, somehow, all of these countries have to get their labour costs down, they have to undergo as what’s known as an internal devaluation. So, that wages are crushed in order, [so] they can export and compete with the Germans. (c. 23:00)

“The problem is this runs into what we, economists, call the fallacy of composition, which is to say that; if we all deflate at the same time, there is no possibility of any of us growing. So, there are two or three possible solutions. One is to admit the whole thing is a failure and to go back to letting 17 individual currencies bloom. This would have the virtue of restoring full fiscal sovereignty to all of the euro member states and getting them away from the insane fiscal austerity policies, that are now being advocated by the European Central Bank, the IMF, and a whole host of core countries, such as Germany.

“Now, obviously the economic dislocations, to the banking system, the payment system, both, within Europe and globally, would be, potentially, catastrophic. It could make the Lehman bankruptcy seem like a leisurely jog in the park by comparison. Now, what some people in Germany have suggested is solution number two, therefore, is that you have a two-speed euro. Some have even argued that Germany should withdraw from the euro, reestablish the deutschmark, and the euro, itself, can become a so-called soft currency. (c. 24:36)

“Well, first of all, there’s the same problem in place. You have no mechanism to do this in an orderly way. And the question becomes: Which countries join the hard-currency bloc? And which join the soft-currency bloc? One country, which I think is particularly vulnerable in this context, is France, even though the French like to think of themselves as a disciplined Teutonic-style country. Its economic and industrial profile is more like that of Italy. So, it could face huge competitive threats from Italian industry, were Italy to remain in a so-called soft currency bloc. (c. 25:25)

“It’s also questionable, whether the French populace, as a whole, could withstand the kinds of restraints to living standards, which the Greeks and the Spanish and the Portuguese are now accepting in order to stay in the Eurozone. This is, after all, the country that invented the guillotine.

“So, the third possibility, which, I think, is the most sensible for a longer term solution, is the United States of Europe. Now, when I use the term United States of Europe, I don’t mean to conjure up an image that it has to be exactly like the United States [of America]. I’ll use the example of my own country, Canada, because it sounds like a lot less threatening example to many people.

“So, let’s take my country, Canada, for example. I come from Toronto. I’m from the largest province, Ontario. So, imagine for a moment that the two largest Canadian provinces—Ontario and Quebec—were independent countries. If this were the case, their debt burdens would consist of their existing debts plus their respecting shares of the current federal government debt. Their capacity to repay those debts would be determined by their respective tax bases, which is to say each province’s nominal GDP. (c. 27:03)

“So, how will these debt burdens look? Well, if you look at the numbers today, Ontario and Quebec would each have debts, that are higher than Spain and about the same as Portugal. This reflects the growing significant social spending responsibilities of the Canadian provinces in areas, such as healthcare and education, which are the two largest sources of government expenditures in Canada. Now, these spending commitments today are funded by fiscal deficits and dead issuance. Quebec and Ontario are also similar to Spain and Portugal in the new environment, that I’ve described, in that they would not control the currency, in which they issue debt. That would be the Canadian dollar, which would be issued by the Bank of Canada, which in turn is a central bank that is now controlled by the federal government. So, given the poor fiscal fundamentals and its inability now to print money, these bonds would surely be skyrocketing in terms of the yields, if they were independent countries. (c. 28:14)

“Well, clearly, that’s not the case. Yields on 10-year Ontario/Quebec government bonds are substantially lower than almost any European Monetary Union country right now. Why is that the case? Because of fiscal federalism and the pooling of risk within the Canadian monetary union. There is an implicit understanding that the federal government will rescue any Canadian province that runs into trouble in the bond market.

“So, that provides an indication that a monetary union, when it’s complemented by a credible fiscal union, can actually work.” (c. 28:55)

BONNIE FAULKNER: “You’re listening to economist and portfolio strategist Marshall Auerback at the Summit on Modern Money Theory in Rimini, Italy. Today’s show: European Integration: The ECB Laid Bare. I’m Bonnie Faulkner. This is Guns and Butter.” (c. 29:15)

MARSHALL AUERBACK: “Now, if Europe, ultimately, opted for this solution, then you would never have a situation where people worried about the creditworthiness of each individual country because it would all be aggregated into the broader Eurozone. Nobody would be worrying about so-called balance of payments deficits. Nobody would be talking about ‘profligate‘ countries, tax cheats, etcetera.

“If you look at the United States today, nobody knows and nobody cares if, say, a country like Texas runs a huge current account surplus with the other 49 States. Nobody cares if West Virginia is a constant recipient of federal fiscal transfers because West Virginia is seen as a broader part of the United States. It’s not a relevant consideration. That’s, ultimately, what we have to do. (c. 30:24)

“But I think, obviously, to get from here to there will take several more years. And the markets are not giving that time. So, I would like to suggest that there is an interim proposal, which can be used to solve the immediate problems at hand.

“Unfortunately, as I’ve said before, we do not have a United States of Europe treasury in Europe. There is only one entity, which creates euros. And that is the European Central Bank. And the European Central Bank, unfortunately, has to play a quasi-fiscal role even though it [resists this] because it is the only entity that actually can solve the underlying solvency problem, which the European Union faces today. (c. 31:17)

“What some of us have suggested, therefore, is for the European Central Bank to distribute trillions of euros, annually, to the national governments on a per capita basis. The per capita criteria means that it is, neither, a targeted bailout nor a reward for so-called bad behaviour. The idea is the distribution would immediately adjust national public debt ratios downward, whilst simultaneously easing credit fears, and not necessarily triggering additional government spending. (c. 32:05)

“Once markets perceive that the countries are no longer heading for insolvency they are more likely to demand less in terms of interest rate. They are more likely to extend credit and to help the countries’ growth again. I liken this to a company, which has a debt problem, which has a large rights issue in the capital markets. If that company is able to successfully conclude a rights issue and is no longer perceived to be facing looming bankruptcy, it’s much easier for it to secure additional funding, so that it can begin to grow again.

“Now, I would emphasise that what I am suggesting is not a means of dealing with the problem of aggregate demand deficiency in the Eurozone. But it is a means of providing a credible way of restoring perceptions of national solvency, so as to open up the capital markets again to countries like Italy, so that they can engage in fiscal expenditures to support growth. Debt without growth is a non-starter, as the Greeks are finding out. (c. 33:24)

“The reason why Greece, for example, can’t grow today is because it is completely shut out of the capital markets for reasons of perceived insolvency. If you eliminate that problem and you create a situation where countries like Italy, Spain, Ireland, Portugal, are viewed more like Ontario than a bankrupt state, then you’re no longer under the strictures of the ECB’s harsh enforced austerity programmes. I will elaborate on these proposals later on this afternoon. But I think it’s important to start to think in these terms. (c. 34:08)

“The crisis is, certainly, forcing a much more radical approach on policymakers than they may have originally felt comfortable about. And I think that it’s important to point out that if this idea I propose seems radical, it’s worth recalling that a few years ago the idea of the European Central Bank buying sovereign debts in the secondary market, as they do today, was considered to be heretical. We were told that this was going to create massive inflation; Zimbabwe was around the corner; and this was gonna be a real problem. And, of course, it hasn’t been the case at all.

“So, we can actually see that the European Central Bank’s balance sheet has expanded massively over the last several months. Weimar hasn’t come. So, it’s time, I think, to dismiss these old economic shibboleths and make people realise that there is an alternative and we’ll try to sketch that out later. But I thought it was important, first, to place this in a historic context. This is a multi-year project. But we can start now. Thank you very much. (c. 35:23)

“I want to make a clarification on something that’s already been discussed a few times today regarding the difference between a user and an issuer of the currency. Countries, such as the United States, Canada, Australia, Japan, and the United Kingdom, all issue their own currency. They have sovereignty in the fullest sense of the word. They can spend with no financing constraints. There may be inflationary constraints, real resource constraints, but there is no inability to pay in a financial sense. That used to be the case for Italy when you had the lira. But now you are a user of a currency. You use other people’s money, so to speak.

“So, that means you are dependent on, either, tax revenues or funding from the capital markets, the bond markets, in order to sustain your growth. So, if the bond markets decide that you are bankrupt or insolvent, they can, effectively, shut you down. They can charge you such a high interest rate that the country can no longer function. That, for example, is the situation in which Greece is in today. And Portugal is coming into that situation as well. (c. 36:58)

“So, we in America we have control of the steering wheel. We don’t often act like we do, but we have total control over the steering wheel. And, unfortunately, you in Italy are passengers in the car. And the bond markets have the steering wheel. And it doesn’t matter what kind of car it is; it could be a dumpy little Ford or it could be a fancy Ferrari. But if you don’t have control of the steering wheel, you can’t drive the car. So, I think it’s very important to clarify that point. (c. 37:34)

“The other thing I’d like to discuss this afternoon is this disturbing trend I see amongst my Italian friends who continue to blame themselves for the current crisis in which they find themselves. There is this sense that somehow you have become lazy profligates and that you’ve been the brats of the European Union and that, therefore, you deserve to be punished. Well, I’m here to absolve you of your sins, even though I’m not a priest. [applause] (c. 38:07)

“I’m going to discuss a variation on an old Greek fable about the industrious ant and the profligate grasshopper. You probably know the traditional story. Over the past two years, in particular, the Greeks have earned an international reputation, as Europe’s grasshoppers. And the Germans have become the ants. Unfortunately, the Greek’s reputation has now spread westward to Portugal, Italy, Spain, and even northwards toward Ireland, as all sorts of non-Greeks are painted with the same brush, as being lazy grasshoppers. The bailout packages for Greece have been accompanied by this propaganda that the Eurozone has been divided into two regions full of industrious northern ants in Germany, the Netherlands, etcetera, and lazy southern grasshoppers.

“So, now with the warmth of the euro’s summer days behind us, now that the easy money of Wall Street has gone, a winter of discontent has descended upon us, allegedly due to the lazy grasshopper’s idleness. That’s the dominant story you hear in Europe today, that you lazy grasshoppers are knocking on the northern ants’ doors, cap in hand, seeking one bailout after another. And the ants, understandably, are coy and they say, ‘Yeah, we’ll give you more money, if you promise to change your ways.’ So, what they are saying is that the stocks that the ants accumulated for the heavy winter are being endangered by these hungry, careless, lazy grasshoppers who resist changing their profligate ways. I’m sure you’ve all heard this story over the last year. (c. 40:04)

“Now, the problem with attractive stories like this is that they can distort as much as they can help. This afternoon I’d like to argue that Aesop’s fable, as attractive as it might be contributes more to Europe’s problem, than it does the solution. And my reason for this is simple. The ants and grasshoppers are found in all areas, in Greece and Italy there are hard-working industrious people, just as there are lazy, profligate grasshoppers in Germany and in the Netherlands and in Austria. But we have tended to assume that all the ants are in the north and all the grasshoppers are in the south. And, therefore, we are introducing toxic remedies to rectify the problem. (c. 40:52)

“It is true that the crisis has placed a disproportionate share of burden on the back of Europe’s ants. But the ants are not exclusively German, Dutch, or Austrian, nor are the grasshoppers exclusively Greek, Italian, or Spanish. Some ants are German and some are Italian. What unites all of Europe’s ants, north and south, east and west, is that they have worked very hard, struggling to make ends meet during the good times and are struggling even more during the bad times. Meanwhile, the grasshoppers, otherwise known as bankers or technocrats, both, in the north and the south of Europe, have lived the good life before the ‘crisis’ and are still doing well today. They are keen as always to privatise any gains they have and socialisethe losses. And they socialise the losses by distributing on the hard-working ants. [applause] (c. 41:54)

“As I’ve said, you’ve been told that you are a bunch of lazy grasshoppers. You’ve been told that you are a nation of tax cheats, profligates, living beyond your means. Those have been the charges. We hear them all the time. That’s the narrative, that has taken hold over the last couple of years. And that’s what the Germans, in particular, continue to propagate. And they have been so successful that even in this great proud nation many people believe it. You have this very weird idea that you’ve been bad and you deserve to be punished. It’s like a form of Stockholm syndrome, or I guess we could call it Berlin syndrome in this case. (c. 42:36)

“Well, it’s not true! And the sooner we understand this fact, the quicker will be the possibility of a proper set of reforms, which will help ants everywhere and where we can stop bailing out the interests of corrupt bankers and EU technocrats, who are totally insulated from the realities of day to day life in Italy and other parts of the European Union.”

BONNIE FAULKNER: “You’re listening to economist and portfolio strategist Marshall Auerback at the Summit on Modern Money Theory in Rimini, Italy. Today’s show: European Integration: The ECB Laid Bare. I’m Bonnie Faulkner. This is Guns and Butter.” (c. 43:17)

MARSHALL AUERBACK: “In Italy, just as in Germany, you have many hard-working people. In many instances, as Alain [Parquez] was saying earlier, they hold two jobs, but have traditionally found it very hard to make ends meet due to low wages, exploitative working conditions, and the rate of inflation for their lowly basket of goods, which is much above the official average, especially after the euro’s introduction boosted food and basic goods prices. Because of this, they took on more debt. They faced massive pressure from the banks to take out loans in order to provide for their children those things that the TV tells them no child should be without and which those with a meagre income cannot really afford. (c. 44:05)

“Now comes the crisis. A number of members of these families lost their jobs. Many of you lost part of your earnings, bank loans were called in, taxes rose, and, in some instances, people have had to contemplate living without electricity because the state is trying to squeeze more tax out of them and they can’t afford it. So, these families’ prospects have collapsed. Yet, somehow, they are being painted as the villains of the peace and the source of the problems of the euro.

“Now, in Germany we also have ants, as I’ve said before. We have hard-working people who make products, that many people enjoy. But they have workers who have had stagnant wages. They, also, have struggled to make ends meet before and after the Eurozone Crisis. Their increasingly productive labour and stagnant wages has meant that there has been a huge transfer of capital from workers to the manufacturers. Profits in Germany have skyrocketed over the last few years; and these have been converted into surpluses whose size grew, largely, due to the redistribution of income away from the German ants, towards their employers. And partly because of the countries greater net exports, which accelerated the cheap German labour, that Germany was becoming. (c. 45:28)

“So, once created these surpluses, these trade surpluses, began to seek higher returns elsewhere due to the low interest rates they produced in Germany. At this point, the German grasshoppers, these bankers, whose aim it was to maximise gain out of the short run out of zero effort, looked south for a good deal. They turned their attention to Greece. They turned their attention to Italy. They turned their attention to Portugal and Ireland. (c. 46:00)

“Now, we were all at this point in this common currency area, but there was still the prospect for an interest rate arbitrage, especially in the areas of personal credit and credit card loans. So, you had German capital produced by the manufacturers’ hard, cheap labour and directed by the irresponsible German grasshoppers flowed south in search of higher returns.

“So, what happens when money floods in unexpectedly? Well, you get bubbles. It’s that simple. In Spain, this took the form of a real estate bubble. In Greece, the bubble manifested itself in the form of public debt, as the Greek grasshoppers, otherwise known as Greek property developers, found it easier to grab the German capital flows by the accounts of the state and whose administrators were only keen to shower the Greek grasshoppers with procurement contracts.

“So, the precise form of the southern bubbles does not matter. They would burst anyway, once the larger bubbles created by our über-grasshoppers on Wall Street popped. What does matter is that the German ants could see that their hard work was not translating into a better life, but into more drudgery and less purchasing power. Now, come the crisis: The German ants, in particular, were told that they must tighten their belt again, at a time when they were falling deeper into a poverty trap. They were told that their government was sending millions, trillions to the so-called P.I.I.G.S.—Portugal, Italy, Ireland, Greece, and Spain, who these Germans assumed were the lazy grasshoppers, since they were never told that the Greek or Spanish or Italian governments are not allowed to use this money to revive growth, but simply to bail out the banks. In fact, the loans were given on the condition that the blow against the ants would be maximised, so as to minimise the pain of the grasshoppers. They were very puzzled. ‘Why,’ they asked, ‘are we working harder than ever and taking home less money? Why does our government keep sending money to these so-called lazy profligates and not to us?‘ (c. 48:21)

“Meanwhile, here in Italy and in Greece and in Portugal, hard-working people like yourselves remain, both, desperate and, also, angry. The grasshoppers of these countries, these would include, as I said, the bankers and the so-called technocrats, such as Signor Monti and Draghi, pointed the finger at them and called them all sorts of names. They joined in the narrative. In fact, just in yesterday’s American Wall Street Journal Mr. Draghi launched an extraordinary attack on the welfare state. He suggested that it was and remains the source of today’s problems in the Eurozone. (c. 49:09)

“So, we’ve had a complete change in the narrative. No longer, as was the case after 2008, was it the reckless lending practices of the banks, their creation of crazy, nuclear style products like credit default swaps, which caused the crisis. Thanks to people like Mr. Draghi, Mrs. Merkel, and Signor Monti, virtually all the so-called leading experts in the West now claim that the crisis was a product of public profligacy and that your failure to address this so-called problem would bring down civilisation as we know it.

“Now, you’re probably all scratching your heads thinking, Well, there must be a mistake, because you’ve never really enjoyed any of the good times the way your bankers friends have. You have struggled before. And you are struggling now, admittedly, far more desperately. (c. 50:10)

“As for the bailouts, you and your neighbours across the Adriatic in Greece can’t see them. Nobody tells you that the trillions end up in Europe’s insolvent banks where they fall into a bottomless black pit. And then you have the added insult to injury where you have the Germans calling you thieves, corrupts, spendthrifts, over-reachers. It’s hard not to reach into the collective memory for moments in history, that make it so easy to become anti-German.

“Now, when the euro was established, there was a very interesting experiment that took place simultaneously in, both, Greece and the periphery. In Germany, governments, employers, and trade unions all tried to restore German competitiveness, they claimed, employment, and growth by reducing German wages and just squeezing German inflation below the European average. (c. 51:10)

“Meanwhile, in countries like Greece, Italy, Spain, and Ireland the governments of that time struggled to prepare the country for accession to the Eurozone by also squeezing real wages and taking advantage of the influx of immigrants into the county to drive them down even further.

“Now, here in Italy there was another interesting wrinkle. And there’s been a very good paper written about this by one of your compatriots, Professor Gustavo Piga. Your public accounts were doctored; they were understated for the use of a number of Wall Street derivatives, which masked the true size of Italy’s public debt. I hasten to add that the use of these products was approved by, both, Eurostat and by Italy’s Treasury at the time. And guess who was the senior official in charge of debt management at the Treasury at this time. I’m sure you already know, but I’ll eliminate the mystery. That’s right; it was Mario Draghi, who subsequently moved to Goldman Sachs where he helped earn fees for the bank by helping to privatise Italy’s national assets. Nice work, if you can get it. (c. 52:23)

“Now, in Germany, the experiment to reduce workers’ benefits by the so-called Hartz Reform, named after the former head of Volkswagen, worked extremely well and kept working after the euro was created. Real wages for workers fell and fell and fell. Unemployment was slashed. But workers earned less; and they couldn’t buy their own output from the gleaning factories, that produced more and more for less and less. German goods flooded the other European markets. And, at the same time, Germany’s success caused money to become even cheaper, flooding the so-called surrounding Eurozone countries, including Greece, Italy, Spain, Ireland. And you used that cheap money to buy more German goods. In other words, your so-called profligacy helped to sustain Germany’s massive trade surplus, which allowed them to run smaller fiscal deficits. But Germany’s ants worked harder for less, while Germany’s own grasshoppers laughed all the way to their bank. (c. 53:32)

“And, for a time, this appeared to work well. Once, the flood of cheap money from outside, from Germany and from Wall Street, allowed the Italians, the Spanish, and the Greeks, and the Portuguese, and their political allies in government to borrow from the Germans, they did so as if there was no tomorrow. Who could blame them? If you’re offered incredibly cheap credit, the temptation becomes overwhelming. The only problem was that every time the Italian or the Greek or the Portuguese ants asked for some of the benefits of being in the euro, they were either paid off with more cheap-skate public sector jobs, paid with borrowed money, or they were told to go to the banks and borrow directly to sustain their lifestyles. (c. 54:16)

“This was done on the back of European structural funds and tied to borrowed money. The Italian grasshoppers, in alliance with some of the German ones, got fatter and fatter, while hard-working ants, such as yourselves, continued to struggle to make ends meet. And then, of course, Wall Street collapsed in 2008. When the collapse occurred across the Atlantic, it hit the banks first and then the Eurozone’s public finances later. I think it’s important to recognise that the banks were hit first. This ‘crisis’ was not caused by excessive government spending. So, of course, when the funding dried up, the bond markets began to question the solvency of the various states who use the euro. (c. 55:03)

“In the first instance, it was Greece. We were told that this is a one-off, that they have been saved. But the reality is that the speculative forces of capital are now heading towards Lisbon.And, after they take care of Lisbon, they will soon go to Spain and Italy.

“The euro was not supposed to work like this. But someone had to be blamed because you can’t own up to a colossal failure like this. Too many people like Signor Monti and Signor Draghi are invested with the success of the euro. They couldn’t possibly admit that they were wrong.”

“So, they all found it convenient to fall back on the scoundrel’s last refuge, nationalism. Suddenly, we have a war of words between Greeks and Germans, northerners and the southerners. We’re now told that nobody was ever bailed out, except for some lazy, grasping people and the deeds of the banks are completely ignored.

“Now, as you know, all of Aesop’s fables have a moral. Many like to think of Aesop’s parable as a morality tale, whose purpose was simply to warn against sloth, laziness, and an unhealthy disregard for the future. But it was more than that; Aesop was also sounding the alarm against, both, the grasshopper spendthrift ways and the ant’s extreme parsimony. (c. 56:22)

“Today, there is another wrinkle that needs to be added to his moral. And that is that when the ants and the grasshoppers are distributed across the division, separating surplus from deficit nations within a badly designed monetary system, the stage is set for a depression, that sets all against each other in a vicious spiral, from which only losers can emerge. So, our only option is that we have to start to subvert this dominant narrative. We have to recognise that coexistence of neglected ants in, both, Italy and Germany, and also recognise that there are over-pampered grasshoppers in, both, Germany and Italy. If we start recognising that, that is a good beginning. Then we can start working towards a system that promotes growth and employment, not perpetual bailouts for banks. And I will leave it at that. Thank you very much.” (c. 57:30)

BONNIE FAULKNER: “You’ve been listening to economist and investment manager Marshall Auerback. Today’s show has been European Integration: The ECB Laid Bare. I’m Bonnie Faulkner. This is Guns and Butter.

“Marshall Auerback has over 28 years of experience in investment management. He is currently a portfolio strategist with Madison Street Partners, a Denver-based investment management group. He is a fellow with the Economists for Peace and Security and a research associate for the Levy Institute. He is a frequent contributor to New Economic Perspectives. Visit http://www.NewEconomicPerspectives.org Or search online for Marshall Auerback. Visit the website for the first Italian Summit on Modern Money Theory at http://www.DemocraziaMMT.info.”

At Media Roots, we’ve been following and featuring the recent radical, or grassroots, economics summit in Rimini, Italy produced by journalist Paolo Barnard, the first annual grassroots Modern Monetary Theory (MMT) Summit. Bonnie Faulkner, of Guns and Butter, travelled to Rimini, Italy and documented the event over its course of several days to broadcast the radical discussions challenging ruling-class dogma, which Italy’s corporate media has virtually censored and U.S. corporate media must similarly marginalise.

Media Roots has previously featured the first and second Guns and Butter broadcasts covering the MMT Summit and have archived those broadcasts and transcripts as well. And here we present the most recent coverage of this important and inspiring international and grassroots summit in Italy. Whether you often follow economic trends or not, this is one discussion of political economy which carries such implications for everyone; you won’t want to miss.

“European Integration: The ECB Laid Bare” with Marshall Auerback. A history of European unification; problems today in the European monetary union; the three Germanys; the fallacy of composition; three possible solutions; Aesop’s Fable of The Ant and the Grasshopper as it applies to the European Union today.

This is Part Three of a multi-part series. Also see these related Lumpenproletariat articles:

LUMPENPROLETARIAT—This week’s edition of free speech radio’s Guns and Butter featured a second installment of host Bonnie Faulkner‘s coverage of the 2012 MMT Summit in Rimini, Italy. (See the first broadcast here.)

Understanding modern monetary theory (MMT, or modern money theory) is vitally important for the working classes with respect to socioeconomic justice and government spending. MMT shows us how we can use modern money for public purpose or social spending, such as a job guarantee programme, which can eliminate involuntary unemployment. Guns and Butter host Bonnie Faulkner was prescient enough to travel to Italy to document this historic event and broadcast a series of weekly installments across American free speech radio.

Last week’s edition of Guns and Butter featured heterodox economists hailing from the radical Economics Department at the University of Missouri-Kansas City, one of the nation’s precious few heterodox economics departments. Dr. Stephanie Kelton gave a brief introduction to “the basics of MMT in four parts”; and Dr. Michael Hudson provided a more historical approach to understanding modern money by discussing “the difference between central bank credit, or money, and commercial banks”.

This week’s edition of Guns and Butter featured heterodox economist Dr. Alain Parguez, who illustrated how a nation’s money system can go horribly wrong without an understanding of modern monetary theory. This has been the case for Eurozone nations, who have suffered national debt burdens and faced draconian austerity politics from the European Central Bank, since they gave up their monetary sovereignty when they abandoned their respective national/sovereign currencies and agreed to adopt the euro as their currency. Grassroots (i.e., radical, from the Latinradix(“root”)) popular resistance to austerity politics in the Eurozone periphery nations (derogatorily dubbed the PIGS), such as in Greece since 2010, has resulted in police rioting and repression and has inspired similar resistance to economic inequality by the grassroots Occupy Wall Street movement since 2011. Dr. Parguez provided important insights into the origins of the Eurozone, the problematic legal foundations of the European Union following the 1992 Treaty of Maastricht, and how the adoption of the euro restricts the economic policy space of the Eurozone nations. Listen (and/or download) here. [1]

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GUNS AND BUTTER—[14 MAR 2017] “The Birth of the European Central Bank: Its Real Agenda” with Alain Parguez at the first Italian Summit on Modern Money Theory in Rimini, Italy.

“Real wages will collapse. And what we have in mind is a total collapse of the share of labour income in the French society and how to get that by the Treaty of Maastricht and the creation of the euro system.” —Dr. Alain Parguez

“I’m Bonnie Faulkner. Today on Guns and Butter: Alain Parguez. Today’s show: The Birth of the European Central Bank: Its Real Agenda. Alain Parguez is Emeritus Professor of Economics, Ist Class, Université de Franche-Comte at Besancon, France; Faculty of Law, Economics and Political Science. He has written extensively on monetary policy, crisis theory, and economic policy, including articles and books on the impact of austerity measures, which he believes are the cause of the world crisis. He is currently writing a book on the general theory of the monetary circuit and its economic policy implications.

“Today’s show features introductory remarks by Alain Parguez at the first Italian grassroots economic Summit on Modern Money Theory in Rimini, Italy, February 2012, produced by Italian journalist Paolo Barnard. The five speakers were Stephanie Kelton, William Black, Alain Parguez, Michael Hudson, and Marshall Auerback.” (c. 2:00)

DR. ALAIN PARGUEZ: “Yes, when I look at this audience, I am ashamed to be French because such an event would be impossible in my own country for two reasons. The government would have tried to forbid it. And the economy and society is in such a state of total disaster that people, even young people, are completely despaired. So, again, Italians are the sole hope of Europe. [applause]

“Contrary to what happens in France, you try to fight the total coup d’état which has been planned a very long time ago, and enshrined into the European monetary union. I shall try to explain that the so-called ‘sovereign crisis’ of sovereign debt is a lie. [applause] But it has been carefully planned by those who build the European system. What they had in mind was the creation of a new totalitarian social order destroying democracy, all kind of social legislation. And now the new treaty imposed by our French president, who makes Berlusconi a saint, deprived the states of any kind of sovereignty, imposed permanent deflation. So, yes, my colleague was right [reaching over to UMKC Professor W.K. Black, seated to his left]. You are what the European ruling-class is afraid of—mobilisation of the people. They want to rule by fear and ignorance. And, at least, thanks to Paolo and thanks to you, there is hope that fear and ignorance will defeat what should be deemed techno-fascism, which is the existing tradition of the European monetary union. So, thank you and hail Italy. [applause] (c. 6:23)

“Well, I am here to speak of a very dark and tragic story. You already understood that the euro is a monster, contradicting all the rules of both modern money, modern economy. So, the problem is why is such an absurd system exists at all. I was told that in your country, like in mine, some people believe that if we get rid of the euro, Italy or France should be back to the state of the poorest part of Africa—Zimbabwe. But the real economy in the Eurozone is already in the state of Zimbabwe. For instance, some short data on France because the French invented and imposed the Eurosystem a very long time ago. In France, the true amount of unemployment is around 60% of the active people, which is obviously enormous. And we have a true rate of inflation of 7% or 8%. So, we don’t have full employment and we don’t have price stability. It means that all official data in Europe arelies.(c. 9:38)

“So, I shall start my true speech by a quotation from the Chief Executive of the French Ministry of Finance—by the way, is a monk of the Order of Santo Benedict and the Chief of the French Opus Dei; and by the way the European Commission is entirely controlled, like the French government, by the Opus Dei. So, I try to discuss with him. He told me, ‘Yes! The French economy is dead, but not enough.’ He told me, ‘Professor, you should understand why the European system exists. What we want is to destroy, forever, the people. We want, forever, to create a new kind of European people, accepting sufferance, poverty, which couldaccept wages lower than in China.And it will be the core of my intervention.’(c. 11:50)

“The Eurosystem was never planned to be a monetary union. It was not even planned as a neoliberal agenda. The neoliberal economics, American style, was and is still completely ignored by the ruling European elite. What you think that even for the leader of the French Socialist Party, President Obama is a Marxist.

“So, what is the euro? A new totalitariansocial order, which was planned a long time ago in the interwar period and completed by the regime of François Mitterrand. In the new order, there will be no more sovereign state. The state has to vanish, at least the state rooted into democracy, parliament, republic. In the new order, power should be entirely transferred to those who deserve it, which means some elite capitalist class technocrats enjoying absolute power of control.” (c. 14:49)

BONNIE FAULKNER: “You’re listening to economics professor and author Alain Parguez at the Summit on Modern Money Theory in Rimini, Italy. Today’s show: The Birth of the European Central Bank: Its Real Agenda. I’m Bonnie Faulkner. This is Guns and Butter.”

DR. ALAIN PARGUEZ: “And, in the first part of my interventions, I shall try briefly to explain the story of the planning of the European monetary union. It started in the interwar period in the most reactionary, traditionalist, part of the French ruling-class with some support from an Italian philosopher, Julius Evola, the very one who accused Mussolini of being too soft to the people and who accused Adolf Hitler of being too soft on poor people.

“In a second part, I shall try to explain that the so-called sovereign debt crisis is obviously an event who never happened in history. But such a crisis has been carefully planned by the architects of the European system. What they had in mind was to privatise the state. And since they believed that the state, at least the state with democracy was always wasting real wealth. It’s obvious that the state being forced to borrow money, the state debt should be looked at as bad debts and, thereby, the state should be completely enslaved to the so-called bonds market, which is exactly what is happening now. (c. 18:37)

“In [the] last part, I shall try to prove that there is not the least way of amending the system because as a social order it has its logic. And those who control the system will never accept any kind of change, especially, any kind of intervention of the European Central Bank. Only, indeed, if those interventions aim at increasing the banks’ wealth. So, the sole possibility of saving the European society is to get rid of that system. The private sector, capitalist sector, in Europe is now dead. To quote Michael Hudson, ‘[few public] leaders of the capitalist sector are no more interested into the real economy. They are rentiers.’ So, European capitalism is dying. [Gross Domestic Product] is for five or six years, in France, minus 3% or 4% a year. (c. 21:12)

“As for the euro, it’s as I wrote, thanks to an invitation by my colleague Stephanie Kelton, a long time ago, on false money, I wrote an article ‘False Money Against the Real Economy.’ And, indeed, it destroyed the real economy. But first let us, briefly, explain the origin of such an absurd system. There are two stages into the planning of the Eurosystem. The first in the interwar period and during 1940-1943. And the second stage, the achievement of the system was, I must say, the masterwork of the regime of François Mitterrand. So, we start in the mid-‘30s with people like Schuman, Jean Monnet. Schuman wrote that in 1927 we need to create Europe as a new order rooted into tradition saving Europe from decadence. Decadence for the poor Europeans means socialism, revolution, Protestants, Jews, Marxism, free access to health and education, abortions, homosexuality, etcetera, etcetera. (c. 24:19)

“And which is extremely interesting, for the early poor Europeans, what they wished was a system completely opposed to the United States society they hated. And the European elite was more hating the United States society of consumption, shopping malls, than they hated USSR. And now it is exactly the same. So, what was required to build Europe, to abolish the state, to force a permanent deflation by squeezing and squeezing public expenditures. It could help to transfer the power to a super-class of technocrats on a supranational scale. But for those early Europeans, what meaned Europe? It mean a condominium between France/Germany and a colonial empire, including Southern Europe and Eastern Europe. They were absolutely explicit on this problem.

“But how could we suppress the state? By depriving the State of any power on money. All of them were fanatical followers of Friedrich Hayek, the most right-wing Austrian economist of that time. So, Europe should rely on a supranational currency, entirely controlled by a sovereign central bank enjoying absolute power to ration the state. Indeed, there, finally, what they wished was to impose a future European currency, as a super-gold standard—” (c. 28:35)

BONNIE FAULKNER: “You’re listening to economics professor and author Alain Parguez at the Summit on Modern Money Theory in Rimini, Italy. Today’s show: The Birth of the European Central Bank: Its Real Agenda. I’m Bonnie Faulkner. This is Guns and Butter.”

DR. ALAIN PARGUEZ: “—of the Treaty of Maastricht, was written by a French economist François Perroux in 1943 with the full support of a treaty passed between the [white] government and the French [Ponant] regime of that time. And the new treaty, which has been decided by President Sarkozy and Madame Merkel, is exactly the blueprint of François Perroux 1943.

“Those people were against the traditional gold standard because they believed that the gold standard had not allowed a total abolition of the power of the state to spend. So, Europe should be a super-gold standard. So, it was a first stage. But, for some time, the European project was maybe in the backwards because all of his supporters were more Hitlerian than Adolf Hitler himself.

“So, we had to wait. The regime of Francois Mitterrand, I could speak on this question because I had been conscripted by the Chief Advisor of Francois Mitterrand, who by the way was a fanatical right-winger hating the modern world, hating the United States, a monarchist, who said, ‘I hate the poor.’ So, Jacques Attali was, de facto, the Prime Minister of France. And Attali was in charge with a lot of former Marxists, turned to supporters of the new regime, of drafting a more sustainable version of the Eurosystem. But they had in mind the same vision: We must destroy shopping malls, consumption. Shopping malls were, for them, a pure infamy. People should accept to be poor. (c. 33:18)

“I remember debates at the secret commission who was in charge of the campaign of Mitterrand. Mitterrand had to win the support of the then-Parti Communiste. France had a communist party; now, no more. So, I was charged to write some modest [condition]; I would say modern money programme. But Attali was asked by those who funded [the] Mitterrand campaign. And who [were] the major funders? The Chase Manhattan Bank and two other American banks. But we never gave you money to get a programme of full employment. Attali said, I have the commitment of our dear future president, as soon as we could, we will destroy, we will cut, we will deflate the economy.Real wages will collapse. And what we have in mind is a total collapse of the share of labour income in the French society. And how to get that? By the Treaty of Maastricht and the creation of the Eurosystem.

“I shall end this intervention by emphasising, first, the lies. It happened that I was quiet close to Francois Mitterrand. He was some long time ago, some boyfriend of my mother before the war. My mother told me, Francois lies so well that he could believe that he is for the people. So, Francois Mitterrand during the sole debate on the Treaty of Maastricht dared to say, answering a question from a student, I can swear there is not the least independent central bank in the Treaty of Maastricht. (c. 37:28)

“The second point. The core principle of the European treaties was the privatisation of the state, was to oblige the state to borrow money by selling bonds to private banks. So, the state, like any corporation, but a corporation with a very pure reputation had to beg money to banks at the rates of interest decreed by banks. So, finally, the Treaty of Maastricht and the following Growth and Stability Pact, a very weird name. The true name should have been Destruction and InstabilityPact. So, the true world they had in mind was that, finally, the State will be completely enslaved to private banks. And, so, will be obliged to cut and cut and cut expenditures. And it is exactly what happened. And, finally, lies continue. To be brief, the share of state debt in the assets of major French/German banks is below 5%. Banks are losing money, not because of state debt, but because of the total collapse of the real economy. (c. 40:50)

“And, second point, I am horrified when people say, Oh, poor banks. The Greek government lied. But it is absurd; everybody was aware of the true state of the Greek economy. 90% of the Greek debt is held, like the Italian, by French and German banks. So, everybody knew. And, by the way, what is happening now sought to the new treaty is—if it is, indeed, finally endorsed—a total abdication of states, of fiscal policy, and any kind of social policy. And, indeed, the dream of the new order will be achieved.

“So, now, the problem of rulers of the system is how to maintain the control of society; of this, they are afraid because there is no debate. Official economists in Germany, France, most European countries, are completely corrupt. If I dare say, they are official prostitutes financed by grants of institutions; so, they never debate the infamy and collapse of European system. Thank you. [applause]” (c. 43:47)

BONNIE FAULKNER: “You’re listening to Economics Professor and author Alain Parguez at the Summit on Modern Money Theory in Rimini, Italy. Today’s show: The Birth of the European Central Bank: Its Real Agenda. I’m Bonnie Faulkner. This is Guns and Butter.” (c. 44:08)

DR. ALAIN PARGUEZ: “You see, let me allow, for a while, [to differentiate] the European Central Bank and banks because, ultimately, who has created the ECB? Who is imposing the European Central Bank policy? The states themselves. Even if the European Central Bank decided to finance state expenditures, the French Government and the German Government will say no. They absolutely are rejecting any kind of policy of saving the economy. Everybody knows that. (c. 45:14)

“First, the European Central Bank is a weak oligarchy of 17 central banks de facto ruled by the French Central Bank and by the German Central Bank. But everybody also knows that the central banks of France and Germany never do anything without the full advice, consent, and support of the new axis ruling in Europe—Paris/Berlin. Thereby, it is exactly the same for banks; governments from France and Germany imposed policies of detritions all over Europe. And now the economy is in such a state of disaster that we need an enormous increase in expenditures. So, it is much more than a job guarantee programme when the majority of the population is forever unemployed. So, my solution is let us support any movement to get rid of the euro. There is no other way. Give back full monetary sovereignty to the states.[applause] (c. 47:25)

“I was told that this event is for the Chair of European Commission, an abomination; and your prime minister was asked to prevent it. At least, the luck for Italy is that you have a weak state, whereas in France we have a very strong state.

“Second point, I do think that what is at stake is to impose a change of politics, people accepting—as learned audience—are living in a world of lies. And you are absolutely right; the share of labour income, including pensions in France/Germany is at its lowest level since the interwar period or the Nazi period. In France, in the span of 20 years, the share of labour income collapsed by at least 30% or 40% percent.And, yes, more and more people are committing suicide in France because of labour conditions. People who are still employed are living in firms who are more and more acting as some kind of Soviet forced-labour concentration [camp]. Never have people been so productive. The productivity in France/Germany [and] is in Italy, one of the highest in the world. But, at the same time, real wages collapsed and people are not aware of this scandal.

“But now, in most parts of France, the shopping malls are empty. A large part of the country is going back to some kind of middle age, an [item] for Germany. And this is a scandal, [of which] we must try to make the people know the truth, to oblige the media to reveal the true situation. Everybody knows that the euro is grossly over-and-over-valued. The euro rate of exchange is maintained by a lot of artefacts, including permanent swaps with the Federal Reserve System. (c. 51:49)

“And now, some thought of France and Germany to get an inflow of dollars from Saudi Arabia and even China. So, the real value of the euro is absolutely nothing. After all, Italy, like France, always survived and prospered in a global environment. Without the euro, Italy was a highly competitive country, as Marshall [Auerback] said. And, so, if I could assure you that Stephanie [Kelton] was right, the euro can’t survive, only if Italy decides to remain in the system. All major banks in France and Germany are already trying to compute the effect of the end of the euro system. It is a dying system. So, the effect could be a benefit for Italy if it retains its monetary sovereignty, reconstruct the economy. (c. 54:08)

“The very option of the United States of Europe had been rejected since the start because those who intended to abolish the state at the national level did not intend to create a state at the European level. We’ve reached a state of the society where the sole option is to leave the system. And, by the way, banks do not want to be reimbursed. It is a point I should address more. The French and the Germans created a system, installing some kind of eternal debt for European people. What banks want is income. And if Italy decided to leave the Euro, the system would collapse. The real value of the euro is nothing. And it is a fact that France and Germany, and mainly the French, are afraid of this point.” (c. 55:55)

BONNIE FAULKNER: “You’ve been listening to Economics Professor and author Alain Parquez. Today’s show has been: The Birth of the European Central Bank: Its Real Agenda. Alain Parquez is Emeritus Professor of Economics Ist Class, Université de Franche-Comté at Besancon (France); Faculty of Law, Economics and Political Science. His main academic title is that of Docteur d’Etat Es Sciences Economiques, Université de Paris 1. He is a member of the Eastern Economic Association in the United States. Courses he has taught during the last eight years include, Principles of Macroeconomics, Theory of Economic Policy, Financial Economy, International Economic Relations, and Theory of Distribution. Visit his website at www.neties.com. Or google: Alain Parquez. Visit the website for the first Italian Summit on Modern Money Theory at www.DemocraziaMMT.info.

MEDIA ROOTS—[15 MAR 2012] Recently, Max Keiser discussed, on RT, the MF Global pillaging scandal, the USA’s eighth largest bankruptcy, and how the Occupy Movement has remained largely silent on the potential rallying-call issue due to a lack of financial literacy. Fortunately, Max Keiser, Dr. Michael Hudson, Dr. Richard Wolff, and others have been speaking at Occupy Movement convergences. Perhaps, in the USA, we may learn to head off the banker fascism austerity now looming over the Eurozone. Media Roots considers the benefits of our increased collective interest in the dynamics of political economy and international relations, impacting our global regions. In this spirit, we present the second broadcast from Pacifica Radio’s Guns and Butter, featuring excerpts of the introductory remarks from radical economist Dr. Alain Parquez at the recent Italian Modern Monetary Theory Summit in Rimini, Italy, February 2012.